Company banks on renewable energy

Reporter: Emma Alberici

KERRY O'BRIEN: Wind power is the world's fastest-growing energy source and a significant source of income for Australian company Pacific Hydro, which has now become the target of a foreign takeover. Spanish building and energy group Acciona this week offered close to $900 million to buy Pacific Hydro which operates water and wind-powered plants in Australia, Chile, Fiji and the Philippines. Unlike Australia, Spain is one of 136 nations that have now signed up to the Kyoto protocol giving it access to valuable carbon trading credits. Spain has also passed laws to make greater use of renewable energy compulsory, hence the interest in Pacific Hydro. But the company's biggest Australian shareholder is refusing to sell out for a big profit because it believes renewable energy offers a potential financial bonanza down the track. Finance editor Emma Alberici reports.

EMMA ALBERICI: Companies from around the world have been blowing in to Australia over the past five months, running the ruler over the business of Pacific Hydro. Its Challicum Hills Wind Farm in Victoria is one of the biggest in the world.

JEFF HARDING, MANAGING DIRECTOR, PACIFIC HYDRO LIMITED: The potential for the company is very strong, because we are experts in the renewable energy industry, and we've demonstrated an ability to operate successfully within Australia and also very successfully internationally.

EMMA ALBERICI: It's a success story that Jeff Harding has been a part of since its small beginnings in Western Australia with the Ord River Hydroelectric Scheme. 10 years later, Spanish company Acciona has offered $866 million to buy the company.

JUAN MURO-LARA, GROUP EXECUTIVE DIRECTOR, ACCIONA: Pacific Hydro is a very attractive company to Acciona here. First of all, it reinforces our determination to lead the sector globally and also it strengthens our presence in two key markets - Australia and Chile.

EMMA ALBERICI: Juan Muro Lara is Acciona's group executive director. He flew into the country yesterday for talks with Pacific Hydro's board and its shareholders, not all of whom have had the welcome mat out for him.

GARRY WEAVEN, EXECUTIVE CHAIRMAN, INDUSTRY FUNDS MANAGEMENT: We're not xenophobic. As I said, we purchase offshore assets and we think it's good to have foreign investment in this country as well, but we think in this particular case we would very much like to find a way to be a long-term player in this company.

EMMA ALBERICI: Garry Weaven represents Industry Funds Management, which holds 32 per cent of Pacific Hydro's shares. The group manages the biggest superannuation funds in the country, investing money on behalf of millions of Australian workers. While the fund stands to make a $210 million profit if it sells its stake, Garry Weaven says it would be simply too hard to find a better investment to put that money into.

GARRY WEAVEN: It's not easy to get a position, a strategic stake in a company of this quality, or indeed in infrastructure assets generally either in Australia or the rest of the world, so we, for that reason, wouldn't give up our stake lightly.

EMMA ALBERICI: Pacific Hydro is among the three biggest renewable energy companies in the world. What makes it such an attractive takeover target for foreign companies is the widespread belief that Australia is yet to appreciate the full potential of green energy.

MICHAEL SMIDDY, UTILITTIES ANALYST, COMMSEC: The cost of producing electricity from these technologies is significantly above that from coal or from gas, hence they require either a subsidy or a mandate of market.

EMMA ALBERICI: Spain, like many other European governments, has passed laws that will see 30% of the country's total energy use come from renewable sources - wind, water and solar - by the year 2010. Here in Australia it's a different story. Last year, the Federal Government dashed the renewable energy industry's hopes when it refused to lift its target beyond 12%, making the local industry far less attractive to investors.

GARRY WEAVEN: I think in a world that's moving ahead rapidly to develop alternative power sources, it's absolutely crazy for Australia to try to stand out against that and say, "We don't want to be part of that," particularly when they have a really first-class company that's actually quite a significant international player in renewable energy, and a chance to be a leader in the industry.

EMMA ALBERICI: Acciona's interest in Pacific Hydro is largely seen as a gamble on a change in Australia's attitudes to green energy, but Juan Muro-Lara says that's not the case.

JUAN MURO-LARA: We have based our business decision and our evaluation and our offer price in the current legal framework in Australia, and we do not foresee or have assumed any future change.

EMMA ALBERICI: Pacific Hydro makes 70 per cent of its income overseas. It's hydroelectric scheme in Chile is its most valuable, with revenue there expected to double every two years. It also has the potential to generate millions of tonnes of lucrative carbon credits which can be traded under the Kyoto protocol. Companies that generate carbon dioxide emissions beyond set limits can buy carbon credits to offset fines. But while Australia hasn't signed up to the protocol, Chile has, and just today Pacific Hydro gained crucial host country approval to trade the credits it receives in Chile, paving the way for a significant new revenue stream.

JEFF HARDING: I think international companies have very much got across the future value of the carbon credit flow whereas a lot of domestic Australian companies haven't yet recognised that there is a market that's already existing and the fact that that will become an enormous market as time progresses.

EMMA ALBERICI: Spain's Acciona has made their bid for Pacific Hydro on the basis that it's accepted by 90 per cent of the shareholders, but with the company's biggest investor determined to hold out, the whole deal could be scuttled.

JUAN MURO-LARA: We are not considering changing any of the conditions of our offer and we want to leverage on Pacific-Hydro to grow.

GARRY WEAVEN: At this stage our belief is that it's in our members' interests and our clients' interests for us to take a longer term view and certainly to hang in and seek to be a long-term player in this company.

EMMA ALBERICI: The Pacific Hydro share price has risen 50 per cent since the company opened its books to potential buyers. Local and international suitors have had five months to decide on the right price and at $4.50 it's unlikely anyone will trump the Acciona bid. Had the government lifted renewable energy targets the price may well have been higher.

GARRY WEAVEN: I think everyone, with the possible exception of the coal industry, everyone else really expected the government to continue with and extend the encouragement for renewable energy, and, of course, they failed to do so. So I think that did set back the local industry considerably.

JEFF HARDING: I think the whole issue of international ownership is an interesting one. We, as a company, have generated a large number of jobs in Australia. It has been one of the things we're very proud of. We believe that with a strong parent ownership, there will be even more jobs created in Australia. So I think at the end of the day for Australia, this may in fact be a good thing.